In this blog, presented by SunRay Construction Solutions and Patrick L Edgerton, Partner, Edgerton & Edgerton, Attorneys at Law, we will provide you key details on how liens and bonds can be used in private and public construction jobs in Illinois to ensure contractors, subcontractors, and material suppliers are paid.
Private Jobs – Mechanics Lien
The Mechanics Lien is a powerful tool that can be used by contractors, subcontractors, and material suppliers to ensure that they get paid for their work done on private projects. The Mechanics Lien Act. 770 ILCS 60/1 et seq. allows contractors to place a pre-judgement, non-consensual lien on real property. What this means is that if you follow all the procedures in place, then you can put a lien on somebody’s real property without having a court order or any signed documents with the owner’s consent on it.
a. 770 ILCS 60/1(a)
The first part of this Act focuses on the lien rights and then it focuses on improvements. It’s important to be aware of what does permanent improvement entail. Sometimes, if an architecture does a drawing but it is not incorporated, then you may not have the rights to exercise a mechanics lien. Remember that if you are listed in the project, then you count.
b. 770 ILCS 60/1(b)
As per this Act, taking additional security by a contractor or sub-contractor is not a waiver of any lien rights, unless it has been explicitly agreed by the parties involved or if the waiver is not prohibited by this Act.
c. 770 ILCS 60/1I
An owner or general contractor cannot put a waiver of rights to file a mechanics lien in the contract and make it enforceable. So, remember that even if you sign such a contract, it cannot be enforced.
New Act – Substitution of Bond for Lien 770 ILCS 60/38.1
In 2016, a new Act called Substitution of Bond was introduced. This new Act was recently introduced in Illinois.
a. What this new Act does is that it allows the owner, other lien claimant, or any other person with interest in the property, etc., to Substitute a Bond for the mechanics lien against the real property.
b. There are several technical requirements that need to be followed. For example, if you want to lien over somebody’s mechanic lien, you can obtain a bond for 175% of the claim amount.
c. The applicant can file the Petition to Substitute a Bond for the Subject Property by ensuring that they meet all the requirements, such as:
i. The petition should be filed with five months after the Complain or Counterclaim by a Mechanics Lien claim is filed.
ii. The petition needs to be verified whether it has all the required details.
d. The petition should either be served personally or through certified mail, with return receipt requested. It should be set to every person identified in the petition and their attorney.
e. If no objection is filed within 30 days after all the involved parties are informed then the objects are waived.
f. If an objection is filed within 30 days, the petitioner may move for hearing with regards to the adequacy of the bond.
g. If the court enters an order discharging as security for the lien claim and substitutes the surety bond as security, then the petition will need to follow the related steps.
h. If approved, action on bond shall be in equity against the principal and surety of bond.
i. This new Act also has provision regarding attorney fees. So,
i. If the lien claimant wins at least 75%, then the claimant can get their attorney fees.
ii. If the lien claimant wins less than 25% of the claim, then the general contractor or owner might be able to get their attorney fees.
iii. If the lien claimant wins between 25% to 75%, then no attorney fees are awarded.
j. Principal and surety may assert only defenses that could have been asserted against the lien claim by the principal or owner of record at the time the contractor’s contractor.
Title Company Escrow (TI Account)
When a lien is put on their real property, many people assume that cannot sell their property or get a mortgage on it. However, this is not completely true. You can do either of them, but it is subject to the lien.
For example, if there is a lien of $20,000 on your property, then the title company will waive it as an exception to the title policy. So, if you put about 1.5 to 2 times of the lien claim amount in escrow, and they foreclose the lien, the title company will give you a chance to defend the claim. If that doesn’t work, then the title company will take the money from the TI account and pay them.
Private construction jobs usually do not have a payment or performance bond, although it is possible but it just involves more cost. Typically, the concept of bond is prevalent in public construction jobs.
Public Construction Jobs
In general, a public construction job in Illinois includes the state itself, and its subdivision, such as City of Chicago, Illinois Department of Transportation, schools, etc. In most cases, it is usually the material suppliers who face the nonpayment issues.
a. Public construction jobs also have municipal liens which is a lien is given to someone who contracts with the contractor. Remember that general contractors do not have lien rights on public jobs. They usually contract directly with the government entity, and if they do not get paid, they have to file a lawsuit.
b. Subcontractors and sub subcontractors can file a lien on public construction jobs and when they are doing this, it means that they are filing a lien on public funds, such as the secretary for the County, the County Clerk, the City of Chicago Secretary, etc.
c. When this municipal lien is filed, it means that the government entity or the person who is in charge of holding funds should hold the money, and under no circumstances should the amount be released until the general contractor has resolved it with the claimant.
d. Whether the delay in payment is because of a minor dispute or some major dispute between the general contractor and the property owner, if you can approach the government entity before the general contractor is fully paid, then you have a chance of fighting for your funds.
e. If in case, the person in charge does not hold the money even after they are served with the lien, then they are personally liable to make the payment.
f. If you have served a municipal lien claim, then you need to file a lawsuit within 90 days and notify the governmental entity by sending the copy of the notice via certified mail with return receipt requested.
g. If you only file the lawsuit and do not notify them within 10 days of filing the lawsuit, then they can treat your lien as an expired lien.
h. The timing plays a key role here because if you serve your notice too late then you don’t get the money owed to you because it is already paid to the general contractor. If you don’t file your lawsuit withing 90 days, then also you will lose out.
Remember that these same rules apply whether it is the state or the subdivision of the state. The only major difference is that it gives you a bit more time to inform the governmental entity when the state is involved; however, the timeline for filing a lawsuit remains the same for both of them, i.e., within 90 days.
Bond Claim: 30 ILCS 550/1 & 30 ILCS 550/2
The primary reason why you have the municipal lien process, and the bond claim process is because you are not allowed to lien governmental units or governmental real property.
a. As per bond claim section 50/1, if you are a general contractor and contracting work for anything over $50,000, then a bond is required. This is to ensure payment for the subs and sub-subs involved in the project.
b. The bonding company is the Surety who makes sure that the rest of the involved parties get paid. The bonding company gets a personal guarantee from the principals of the general contractor.
c. So, if the owner, i.e., the governmental agency does not pay the amount due to the general who in turn do not pay the subs, then the bonding company provides the payment, and gets it reimbursed from the general contractor.
d. Similarly, if the general contractor lets go of the project in the middle, then the bonding company hires a new contractor to finish the job as per the set timelines. Then they get the money reimbursed from the general contractor.
So, remember that these payment and performance bonds may not work in the favor of the general contractor, but they are a powerful tool for subs to ensure that they get paid.
Key Points to Remember
Here are some key points to remember with regards to bond claim:
a. General contractors do not make claims against their own bond. Only subcontractors and sub subcontractors can do it.
b. You file your lawsuit within 180 days and then you send a certified copy of that to all the required parties, including the general contractor who has been named by the bonding company.
c. If in case the general contractor goes out of business and does not have any money owed by the governmental agency, then the bonding company will come in and pay you.
d. In such cases, the bonding company can make defenses against you and if you have messed up, they can use it against you. So, ensure that your claim includes all the required information.
Public Construction Jobs (Federal Property)
If you are working on federal jobs, then you need to be aware of the Miller Act. 40 U.S.C.A. §§ 3131 et seq.
a. If the federal job is valued at or more than $100,000, the governmental entity requires a performance bond to ensure that the job gets done and a payment bond to ensure that the subs and sub subs get paid.
b. You cannot file a lien against a federal property.
c. A civil action should be brought within 90 days after the last date furnish work.
d. You also need to serve a notice to the governmental agency and let them know that they need to hold the money and not pay the general contractor until the issue is resolved.
Do not forget that general contractors do not have lien or bond rights against Federal, State, or Subdivision thereof.